| • JOURNAL COMMUNICATIONS INC 10-Q 3-25-2012 • EXHIBIT 10.1 • EXHIBIT 10.2 • EXHIBIT 10.3 • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32 • XBRL INSTANCE DOCUMENT • XBRL SCHEMA DOCUMENT • XBRL CALCULATION LINKBASE DOCUMENT • XBRL DEFINITION LINKBASE DOCUMENT • XBRL LABEL LINKBASE DOCUMENT • XBRL PRESENTATION LINKBASE DOCUMENT | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended: March 25, 2012
or
For the transition period from to
Commission File Number: 1-31805
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Number of shares outstanding of each of the issuer’s classes of common stock as of April 27:
JOURNAL COMMUNICATIONS, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JOURNAL COMMUNICATIONS, INC.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
See accompanying notes to unaudited condensed consolidated financial statements.
JOURNAL COMMUNICATIONS, INC.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
See accompanying notes to unaudited condensed consolidated financial statements.
JOURNAL COMMUNICATIONS, INC.
Unaudited Condensed Consolidated Statements of Comprehensive Income
(in thousands)
See accompanying notes to unaudited condensed consolidated financial statements.
JOURNAL COMMUNICATIONS, INC.
Unaudited Condensed Consolidated Statement of EquityFor the First Quarter Ended March 25, 2012
(in thousands, except per share amounts)
See accompanying notes to unaudited condensed consolidated financial statements.
JOURNAL COMMUNICATIONS, INC.
Unaudited Condensed Consolidated Statement of EquityFor the First Quarter Ended March 27, 2011
(in thousands, except per share amounts)
See accompanying notes to unaudited condensed consolidated financial statements.
JOURNAL COMMUNICATIONS, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
See accompanying notes to unaudited condensed consolidated financial statements.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
The accompanying unaudited condensed consolidated financial statements have been prepared by Journal Communications, Inc. and its wholly owned subsidiaries and a variable interest entity (VIE) for which we are the primary beneficiary in accordance with U.S. generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission and reflect normal and recurring adjustments, which we believe to be necessary for a fair presentation. As permitted by these regulations, these statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for annual financial statements. However, we believe that the disclosures are adequate to make the information presented not misleading. The gain on the sale of NorthStar Print Group Inc.’s (NorthStar) real estate holdings in the first quarter of 2011 has been reflected as discontinued operations in our condensed consolidated statements of operations. The balance sheet at December 25, 2011 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The operating results for the first quarter ended March 25, 2012 are not necessarily indicative of the operating results that may be expected for the fiscal year ending December 30, 2012. You should read these unaudited condensed consolidated financial statements in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 25, 2011.
We report on a 52-53 week fiscal year ending on the last Sunday of December in each year. In addition, we have four quarterly reporting periods, each consisting of 13 weeks and ending on a Sunday, provided that once every six years, the fourth quarterly reporting period will be 14 weeks. The fourth quarterly reporting period in our 2012 fiscal year will consist of 14 weeks.
In September 2011, the Financial Accounting Standards Board (FASB) issued amended guidance for goodwill impairment. The guidance simplifies how entities test goodwill for impairment. The new guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity will be required to perform the two-step impairment test only if it concludes that the fair value of a reporting unit is more likely than not, less than its carrying value. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We adopted this guidance in the first quarter of 2012. There has been no impact on our consolidated financial statements.
In June 2011, the FASB issued amended guidance for comprehensive income. The guidance requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Subsequently, in December 2011, the FASB issued its final standard to defer the new requirement to present components of reclassifications of other comprehensive income on the face of the income statement. The other requirements contained in the new standard on comprehensive income must still be adopted. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We adopted this guidance in the first quarter of 2012 and opted to present the total of comprehensive income in two separate but consecutive statements.
In May 2011, the FASB issued amended guidance for fair value measurement and disclosure requirements between U.S. generally accepted accounting principles and International Financial Reporting Standards (IFRS). The new guidance includes amendments to clarify the definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. generally accepted accounting principles and IFRS. The guidance also changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We adopted this guidance in the first quarter of 2012. There has been no impact on our consolidated financial statements.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
Basic
We apply the two-class method for calculating and presenting our basic earnings per share. As noted in the FASB’s guidance for earnings per share, the two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under that method:
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
In applying the two-class method, we have determined that undistributed earnings should be allocated equally on a per share basis among each class of common stock due to the lack of any contractual participation rights of any class to those undistributed earnings. Undistributed losses are allocated to only the class A and B common stock for the reason stated above.
The following table sets forth the computation of basic earnings per share under the two-class method:
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
Diluted
Diluted earnings per share is computed based upon the assumption that common shares are issued upon exercise of our stock appreciation rights when the exercise price is less than the average market price of our common shares and common shares will be outstanding upon expiration of the vesting periods for our non-vested restricted stock and performance-based restricted stock units. For the first quarters of 2012 and 2011, 95 and 220 non-vested restricted class B common shares and performance-based restricted stock units, respectively, are not deemed to be outstanding upon expiration of the vesting periods because they are anti-dilutive. The class C shares are not converted into class A and B shares because they are anti-dilutive for all periods presented, and therefore are not included in the diluted weighted average shares outstanding.
The following table sets forth the computation of diluted net earnings per share for class A and B common stock:
Diluted earnings per share for the class C common stock is the same as basic earnings per share for class C common stock because there are no class C common stock equivalents.
Each of the 3,264,000 class C shares outstanding is convertible at any time at the option of the holder into either (i) 1.363970 class A shares (or a total of 4,451,998 class A shares) or (ii) 0.248243 class A shares (or a total of 810,265 class A shares) and 1.115727 class B shares (or a total of 3,641,733 class B shares).
We have an affiliation agreement with ACE TV, Inc. for the rights under a local marketing agreement for WACY-TV in Appleton, Wisconsin and to acquire certain assets of ACE TV, Inc. including the broadcast license of WACY-TV for a purchase price of $2,038, pending FCC rule changes and approval. Under the affiliation agreement, ACE TV, Inc. provides the programming for WACY-TV and we sell advertising time, provide all other television operating activities and own the non-broadcast license assets used by WACY-TV. Based on our power to direct certain activities and our right to ultimately acquire the broadcast license, we have determined that ACE TV, Inc. is a VIE and that we are the primary beneficiary of the variable interests of WACY-TV. As a result, we have consolidated the net assets of ACE TV, Inc., aggregating $1,164 which consists primarily of a broadcast license and investments. The investments of ACE TV, Inc. can be used only to settle obligations of ACE TV, Inc. Creditors of ACE TV, Inc. have no recourse to our general credit. We have not provided financial or other support that we are not contractually required to provide.
Inventories are stated at the lower of cost (first in, first out method) or market. Inventories as of March 25, 2012 and December 25, 2011 consist of the following:
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
Our non-interest bearing accounts receivable arise primarily from the sale of advertising, commercial printing, commercial distribution and the retransmission of our television programs by Multiple Video Programming Distributors (MVPDs). We record accounts receivable at original invoice amounts. The accounts receivable balance is reduced by an estimated allowance for doubtful accounts. We evaluate the collectability of our accounts receivable based on a combination of factors. We specifically review historical write-off activity by market, large customer concentrations, customer creditworthiness and changes in our customer payment patterns and terms when evaluating the adequacy of the allowance for doubtful accounts. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations, we record a specific reserve to reduce the amounts recorded to what we believe will be collected. For all other customers, we recognize allowances for bad debts based on historical experience of bad debts as a percent of accounts receivable for each business unit. We write off uncollectible accounts against the allowance for doubtful accounts after collection efforts have been exhausted. The allowance for doubtful accounts at March 25, 2012 and December 25, 2011 was $1,737 and $1,870, respectively.
We received a $450 secured note resulting from the sale of two radio stations in Boise, Idaho in September 2009. Interest-only payments are due monthly and the principal balance of the note is due on September 25, 2014. Principal payments totaling $50 were received in 2011 and 2010. The note receivable balance at March 25, 2012 and December 25, 2011 was $400. This note receivable is reported in other assets in the consolidated balance sheets. Management monitors the level of payment activity and, to date, all monthly interest-only payments have been received on time and in full. We believe that we will collect the amount owed to us.
In consideration for the sale of the Clearwater, Florida-based operations of PrimeNet in February 2010, we received a $700 promissory note repayable over four years and a $147 working capital note repayable over three years. At the time of the sale, we recorded receivables of $587 and $129, respectively, representing the fair value of the notes discounted at 6.785% and 9.08%, respectively. At December 25, 2011, the notes receivables balances were $433 and $51, respectively, and reported in receivables, net in the consolidated balance sheets. In January 2012, both notes were paid in full.
Interest income and the unamortized discount on our notes receivable are recorded using the effective interest method.
Definite-lived Intangibles
Our definite-lived intangible assets consist primarily of network affiliation agreements, customer lists, non-compete agreements and trade names. We amortize the network affiliation agreements over a period of 25 years based on our good relationships with the networks, our long history of renewing these agreements and because 25 years is deemed to be the length of time before a material modification of the underlying contract would occur. We amortize the customer lists over a period of five to 15 years, the non-compete agreements and franchise agreement fees over the terms of the contracts and the tradenames over a period of 25 years. Management determined there were no significant adverse changes in the value of these assets as of March 25, 2012.
Amortization expense was $381 for the first quarter ended March 25, 2012, and $392 for the first quarter ended March 27, 2011. Estimated amortization expense for our next five fiscal years is $1,485 for 2012, $1,367 for 2013, $1,273 for 2014, $1,263 for 2015 and $1,263 for 2016.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
The gross carrying amount, accumulated amortization and net carrying amount of the major classes of definite-lived intangible assets as of March 25, 2012 and December 25, 2011 are as follows:
Indefinite-lived Intangibles
Broadcast licenses are deemed to have indefinite useful lives because we have renewed these agreements without issue in the past and we intend to renew them indefinitely in the future. Accordingly, we expect the cash flows from our broadcast licenses to continue indefinitely. The net carrying amount of our broadcast licenses was $81,547 as of March 25, 2012 and December 25, 2011.
The costs incurred to renew or extend the term of our broadcast licenses and certain customer relationships are expensed as incurred.
Goodwill
There were no changes in the carrying amount of goodwill for the quarter ended March 25, 2012. As of March 25, 2012, we have $3,857 of goodwill recorded at our community newspapers and shoppers reporting unit and $4,813 of goodwill recorded at our broadcasting reporting unit. We do not believe either of these reporting units is at risk for failing the step one impairment test in accordance with the FASB’s guidance for accounting for goodwill and intangible assets.
During the first quarter of 2012, we recorded a pre-tax charge of $38 for workforce separation benefits across our publishing businesses. These charges are recorded in operating costs and expenses and selling and administrative expenses in the consolidated statement of operations. The ongoing activity of our liability for separation benefits during the first quarter of 2012 was as follows:
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
We file tax returns in the United States federal jurisdiction, as well as approximately 15 state and local jurisdictions. The statute of limitations for assessing additional taxes is three years for federal purposes and typically between three and four years for state and local purposes. Accordingly, our 2008 through 2010 tax returns are open for federal purposes, and our 2007 through 2010 tax returns remain open for state tax purposes, unless the statute of limitations has been previously extended. Currently, we are under audit in Wisconsin for our 2004 through 2007 tax returns and Illinois for our 2006 and 2007 tax returns.
As of March 25, 2012, our liability for unrecognized tax benefits was $885, which, if recognized, would have an impact on our effective tax rate. We recognize interest income/expense and penalties related to unrecognized tax benefits in our provision for income taxes. As of March 25, 2012, we had $292 accrued for interest expense and penalties. During the first quarter of 2012, we recognized $10 in interest expense. As of March 25, 2012, it is possible for $284 of unrecognized tax benefits and related interest to be recognized within the next 12 months due to settlements with taxing authorities.
We provided a guarantee to the landlord of our former New England community newspapers and shopper business, which was sold in 2007, with respect to tenant liabilities and obligations associated with a lease which expires in December 2016. As of March 25, 2012, our potential obligation pursuant to the guarantee was $857, plus costs of collection, attorney fees and other charges incurred if the tenant defaults. As part of the sales transaction, we received a guarantee from the parent entity of the buyer of our New England business that the buyer will satisfy all the liabilities and obligations of the assigned lease. In the event that the buyer fails to satisfy its liabilities and obligations and the landlord invokes our guarantee, we have a right to indemnification from the buyer’s parent entity.
The components of our net periodic benefit (income) costs for our defined benefit and non-qualified pension plans and our postretirement health benefit plan are as follows:
We fund our defined benefit pension plan at the minimum amount required by the Pension Protection Act of 2006. Based on current projections, we expect to contribute $4,200 to our qualified defined benefit pension plan in 2012. We expect to contribute $489 to our unfunded non-qualified pension plan in 2012.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
We have a secured credit facility of $225,000 that expires on December 2, 2013. The secured credit facility is secured by liens on certain of our assets and the assets of our subsidiaries and contains affirmative, negative and financial covenants which are customary for financings of this type, including, among other things, limits on the creation of liens, limits on the incurrence of indebtedness, restrictions on dispositions and restrictions on dividends. At our option, the commitments under the secured credit facility may be increased from time to time to an aggregate amount of incremental commitments not to exceed $100,000. The increase option is subject to the satisfaction of certain conditions, including the identification of lenders (which may include existing lenders or new lenders) willing to provide the additional commitments.
Our borrowings under the secured credit facility incur interest at either LIBOR plus a margin that ranges from 225.0 basis points to 350.0 basis points, depending on our leverage, or (i) the base rate, which equals the highest of the prime rate set by U.S. Bank National Association, the Federal Funds Rate plus 100.0 basis points or one-month LIBOR plus 150.0 basis points, plus (ii) a margin that ranges from 125.0 basis points to 250.0 basis points, depending on our leverage. As of March 25, 2012 and December 25, 2011, we had borrowings of $37,725 and $41,305, respectively, under our credit facility at a weighted average interest rate of 2.64% and 2.65%, respectively.
Fees in connection with the credit facility of $3,551 are being amortized over the term of the secured credit facility using the effective interest method.
We estimate the fair value of our secured credit facility at March 25, 2012 to be $37,570, based on discounted cash flows using an interest rate of 2.90%. We estimated the fair value of our secured credit facility at December 25, 2011 to be $40,988, based on discounted cash flows using an interest rate of 3.05%. These fair value measurements fall within Level 2 of the fair value hierarchy.
The secured credit facility contains the following financial covenants, which remain constant over the term of the agreement:
One or more of the lenders in our secured credit facility syndicate could be unable to fund future draws thereunder or take other positions adverse to us. In such an event, our liquidity could be constrained with an adverse impact on our ability to operate our businesses.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
2007 Journal Communications, Inc. Omnibus Incentive Plan
The purpose of the 2007 Journal Communications, Inc. Omnibus Incentive Plan (2007 Plan) is to promote our success by linking personal interests of our employees, officers and non-employee directors to those of our shareholders, and by providing participants with an incentive for outstanding performance. The 2007 Plan is also intended to enhance our ability to attract, motivate and retain the services of employees, officers and directors upon whose judgment, interest and special effort the successful conduct of our operation is largely dependent.
Subject to adjustment as provided in the 2007 Plan, the aggregate number of shares of class A common stock or class B common stock reserved and available for issuance pursuant to awards granted under the 2007 Plan is 4,800,000 shares which may be awarded in the form of nonstatutory or incentive stock options, stock appreciation rights, restricted stock, restricted or deferred stock units, performance awards, dividend equivalents or other stock-based awards. The 2007 Plan also provides for the issuance of cash-based awards. The 2007 Plan replaced the 2003 Equity Incentive Plan (2003 Plan) and, as of May 3, 2007, all equity grants are made from the 2007 Plan. We will not grant any additional awards under the 2003 Plan. As of March 25, 2012 there are 2,546,840 shares available for issuance under the 2007 Plan.
During the first quarter ended March 25, 2012 we recognized $304 in stock-based compensation expense. Total income tax benefit recognized related to stock-based compensation for the first quarter ended March 25, 2012 was $127. During the first quarter ended March 27, 2011, we recognized $292 in stock-based compensation expense. Total income tax benefit recognized related to stock-based compensation for the first quarter ended March 27, 2011 was $113. We recognize stock-based compensation expense on a straight-line basis over the service period based upon the fair value of the award on the grant date. As of March 25, 2012, total unrecognized compensation cost related to stock-based compensation awards was $2,544 net of estimated forfeitures, which we expect to recognize over a weighted average period of 1.5 years. Stock-based compensation expense is reported in selling and administrative expenses in our condensed consolidated statements of operations.
Stock grants
The compensation committee of our board of directors has granted class B common stock to employees and non-employee directors under our 2003 Plan and our 2007 Plan. Each stock grant may have been accompanied by restrictions, or may have been made without any restrictions, as the compensation committee of our board of directors determined. Such restrictions could have included requirements that the participant remain in our continuous employment for a specified period of time, or that we or the participant meet designated performance goals. We value non-vested restricted stock grants at the closing market prices of our class A common stock on the grant date.
A summary of stock grant activity during the first quarter of 2012 is:
Our non-vested restricted stock grants vest from one to three years from the grant date. The total fair value of shares vesting during the first quarter of 2012 was $490. There was an aggregate of 246,980 unrestricted and non-vested restricted stock grants issued to our non-employee directors (3,980 shares) and employees (243,000 shares) in the first quarter of 2011 at a weighted average fair value of $5.94 per share, of which 82,901 of the non-vested restricted shares have since vested.
Performance units
In the first quarter of 2012, the compensation committee of our board of directors approved performance-based restricted stock units (performance units), which represent the right to earn shares of class B common stock based on continued employment and the achievement of specified targets for adjusted cumulative EBITDA over the 2012 to 2014 fiscal year performance period under our 2007 Plan. We value performance unit awards at the closing market price of our class A common stock on the grant date. In the first quarter of 2012, we granted 76,700 performance units at a weighted average fair value of $5.59. The actual number of performance units that vest will be determined at the end of the three year performance period. As of March 25, 2012, 76,700 performance units remain unvested.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
Employee stock purchase plan
The 2003 Employee Stock Purchase Plan permits eligible employees to purchase our class B common stock at 90% of the fair market value measured as of the closing market price of our class A common stock on the day of purchase. We recognize compensation expense equal to the 10% discount of the fair market value. Subject to certain adjustments, 3,000,000 shares of our class B common stock are authorized for sale under this plan. There were 32,626 class B common shares sold to employees under this plan in the first quarter of 2012 at a weighted average fair value of $3.96. As of March 25, 2012, there are 2,230,997 shares available for sale under the plan.
Stock appreciation rights
A stock appreciation right, or SAR, represents the right to receive an amount equal to the excess of the fair value of a share of our class B common stock on the exercise date over the base value of the SAR, which shall not be less than the fair value of a share of our class B common stock on the grant date. Each SAR is settled only in shares of our class B common stock. The term during which any SAR may be exercised is 10 years from the grant date, or such shorter period as determined by the compensation committee of our board of directors.
Our SARs vest over a three year graded vesting schedule and it is our policy to recognize compensation cost for awards with graded vesting on a straight-line basis over the vesting period for the entire award. We ensure the compensation cost recognized at any date is at least equal to the portion of the grant-date value of the award that is vested at that date. The fixed price SARs have a fixed base value equal to the closing price of our class A common stock on the date of grant. The escalating price SARs have an escalating base value that starts with the closing price of our class A common stock on the date of grant and increases by six percent per year for each year that the SARs remain outstanding, starting on the first anniversary of the grant date.
A summary of SAR activity during the first quarter of 2012 is:
All SARs issued have vested. The aggregate intrinsic value of the SARs outstanding and exercisable at the end of the first quarter of 2012 is zero because the fair market value of our class B common stock on March 25, 2012 was lower than the weighted average exercise price of the SARs.
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
NorthStar Print Group, Inc.
During 2005, Multi-Color Corporation (Multi-Color) acquired substantially all of the assets and certain liabilities of NorthStar Print Group, Inc. (NorthStar), our former label printing business. Certain liabilities were excluded from the sale of NorthStar and primarily consisted of environmental site closure costs for both the Green Bay, Wisconsin real estate and real estate located in Norway, Michigan. In January 2011, upon environmental site closure in Green Bay, Wisconsin, we sold the real estate holdings to Multi-Color according to the 2005 sale agreement. The net proceeds were $822 and we recorded a pre-tax gain of $610. We continue to have environmental site closure obligations with respect to the Norway, Michigan real estate, which was sold to Multi-Color in 2005.
The following table summarizes NorthStar’s revenue and earnings before income taxes as reported in earnings from discontinued operations, net of applicable income taxes in the condensed consolidated statement of operations for the first quarter ended March 25, 2012 and March 27, 2011:
JOURNAL COMMUNICATIONS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
Our business segments are based on the organizational structure used by management for making operating and investment decisions and for assessing performance. Our reportable business segments are: (i) broadcasting; (ii) publishing; and (iii) corporate. Our broadcasting segment consists of 33 radio stations and 13 television stations in 12 states and the operation of a television station under a local marketing agreement. Our publishing segment consists of the Milwaukee Journal Sentinel, which serves as the only major daily newspaper for the Milwaukee metropolitan area, and several community newspapers and shoppers in Wisconsin. Our corporate segment consists of unallocated corporate expenses and revenue eliminations.
The following tables summarize revenue, operating earnings (loss), depreciation and amortization and capital expenditures for the first quarter ended March 25, 2012 and March 27, 2011 and identifiable total assets as of March 25, 2012 and December 25, 2011:
On March 7, 2012, Journal Broadcast Group announced that it reached an agreement to purchase KHTT-FM and KBEZ-FM in Tulsa, Oklahoma from Renda Broadcasting Corporation. Journal Broadcast Group also entered into a local marketing agreement with Renda Broadcasting Corporation on March 7, 2012, which was effective on March 26, 2012. The estimated cash purchase price for KHTT-FM and KBEZ-FM is $11,800. The transaction is subject to FCC approval.
The following discussion of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements for the first quarter ended March 25, 2012, including the notes thereto.
More information regarding us is available at our website at www.journalcommunications.com. We are not including the information contained in our website as a part of, or incorporating it by reference into, this Quarterly Report on Form 10-Q. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are made available to the public at no charge, other than a reader’s own internet access charges, through a link appearing on our website. We provide access to such material through our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC).
Forward-Looking Statements
We make certain statements in this Quarterly Report on Form 10-Q (including the information that we incorporate by reference herein) that are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in that Act, and we are including this statement for purposes of those safe harbor provisions. These forward-looking statements generally include all statements other than statements of historical fact, including statements regarding our future financial position, business strategy, budgets, projected revenues and expenses, expected regulatory actions and plans and objectives of management for future operations. We often use words such as "may," "will," "intend," "anticipate," "believe," or "should" and similar expressions in this Quarterly Report on Form 10-Q to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors could cause actual results to differ materially from those expressed or implied by those forward-looking statements. Among such risks, uncertainties and other factors that may impact us are the following as well as those contained in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 25, 2011:
We caution you not to place undue reliance on these forward-looking statements, which we have made as of the date of this Quarterly Report on Form 10-Q.
Overview
Our business segments are based on the organizational structure used by management for making operating and investment decisions and for assessing performance. Our reportable business segments are: (i) broadcasting; (ii) publishing; and (iii) corporate. Our broadcasting segment consists of 33 radio stations and 13 television stations in 12 states and the operation of a television station under a local marketing agreement. In addition, in the first quarter of 2012, we reached an agreement to purchase two radio stations in Tulsa, Oklahoma and entered into a local marketing agreement to operate the stations, effective on March 26, 2012. Results from our interactive media assets are included in our broadcasting and publishing segments. Our publishing segment consists of the Milwaukee Journal Sentinel, which serves as the only major daily newspaper for the Milwaukee metropolitan area, and several community newspapers and shoppers in Wisconsin. Our corporate segment consists of unallocated corporate expenses and revenue eliminations.
Revenues in the broadcast industry are derived primarily from the sale of advertising time to local, national, and political and issue advertisers, retransmission fees and, to a lesser extent, from barter, digital revenues and other revenues. Our television and radio stations are attracting new local advertisers through the creation of new local content and programs that combine television or radio with digital. Because television and radio broadcasters rely upon advertising revenue, they are subject to cyclical changes in the economy. The size of advertisers’ budgets, which are affected by broad economic trends, affects the radio industry in general and the revenue of individual television stations, in particular. Our broadcasting business continues to experience an uneven economic recovery across the markets in which we operate due to continued challenges in employment and the housing markets. Our broadcasting business also is affected by audience fragmentation as audiences have an increasing number of options to access news and other programming. Television advertising revenue and rates in even-numbered years typically benefit from political and issue advertising because there tends to be more pressure on available inventory as the demand for advertising increases and we have the opportunity to increase average unit rates we charge our customers. Even-numbered years also benefit from Olympics related advertising on our three NBC affiliates. The expected increased ratings during the Olympic time period, in the third quarter of 2012, as well as the additional available inventory, for our three NBC affiliates provides us the opportunity to sell advertising at premium rates.
Over the past several years, fundamentals in the newspaper industry have deteriorated significantly. Retail and classified run-of-press (ROP) advertising have decreased from historic levels due in part to department store consolidation, weakened employment, automotive and real estate economics and a migration of advertising to the internet and other advertising forms. Circulation declines and online competition have also negatively impacted newspaper industry revenues. Additionally, the continued housing market downturn has adversely impacted the newspaper industry, including real estate classified advertising as well as the home improvement, furniture and financial services advertising categories.
Revenue from our broadcasting businesses increased $2.3 million in the first quarter of 2012 compared to the first quarter of 2011. This is primarily due to a $1.2 million increase in national advertising revenue, a $0.5 million increase in local advertising revenue, a $0.4 million increase in political and issue advertising revenue and a $0.4 million increase in retransmission revenue, partially offset by a $0.2 million decrease in other revenue. The increase in national advertising revenue was driven by communications, financial and media categories. The increase in local advertising revenue was driven by automotive, furniture and electronics, and legal categories. Total expenses from our broadcasting business increased $1.6 million, or 4.2%, in the first quarter of 2012 compared to the first quarter of 2011, primarily due to an increase in employee related costs as well as contractual increases in network affiliation fees. These increases were partially offset by a charge recorded in 2011 for the expected loss from the broadcast rights fee of a sports contract. Operating earnings from our broadcasting business increased $0.7 million in the first quarter of 2012 compared to the first quarter of 2011, primarily due to an increase in advertising revenue, partially offset by an increase in operating expenses.
In the first quarter of 2012, our publishing businesses continued to be impacted by the uneven economic recovery and the secular and cyclical influences affecting the newspaper industry. We have seen advertisers reduce their spending in virtually all advertising categories. In addition, the first quarter of 2011 included $0.7 million of advertising revenue related to the Green Bay Packers postseason games and Super Bowl victory. Retail advertising revenue decreased $2.4 million in the first quarter of 2012 compared to the first quarter of 2011, primarily due to a decrease in ROP and preprint advertising primarily in the finance/insurance, communications, food and entertainment, and building categories. Classified advertising revenue, primarily automotive and employment categories, also decreased in the first quarter of 2012 compared to the first quarter of 2011. Interactive advertising revenue of $2.6 million decreased 1.6%, primarily due to a decline in classified advertising revenue that more than offset increases in sponsorship and other online revenue. National advertising revenue decreased $0.3 million in the first quarter of 2012 due to a decrease in ROP advertising in the health and entertainment categories. In the first quarter of 2012, the Milwaukee Journal Sentinel introduced a digital subscription program, or “paywall,” on our jsonline.com website. Integrated into the launch of the paywall was a price increase to our home delivery subscribers, who gain full access to all digital products with their subscription fee. However, circulation revenue was down $0.3 million in the first quarter of 2012 compared to the first quarter of 2011 driven by comparisons to increased sales in 2011 when the Green Bay Packers were in the Super Bowl which more than off-set price increases tied to the launch of our digital subscription program. At our daily newspaper, commercial delivery revenue was essentially flat year-over-year and commercial printing revenue increased $0.3 million, or 13.0% in the first quarter of 2012 compared to the first quarter of 2011. Total expenses at our publishing businesses decreased $2.7 million, or 6.7%, in the first quarter of 2012 compared to the first quarter of 2011 primarily due to decreased newsprint consumption and delivery costs and expenses related to the Florida-based community newspapers and shoppers businesses sold in the second and third quarters of 2011, partially offset by an increase in employee benefit costs. Operating earnings at our publishing businesses decreased $1.1 million in the first quarter of 2012 compared to the first quarter of 2011. The decrease in operating earnings was primarily due to the impact of the decrease in advertising revenue.
Advertising revenue at our publishing and broadcasting businesses reflects continued cautious behavior of both our customers and consumers. While we are seeing some improvement at our broadcasting business, persistent high unemployment, lack of strong economic growth and continued economic uncertainty in an election year temper our optimism. Revenue levels in our broadcasting business will continue to be affected by increased competition for audiences. We do not expect that revenues at our daily newspaper will return to revenue levels reported in 2011 or prior years given the secular changes affecting the newspaper industry.
In 2012, we will seek in-market growth opportunities in traditional or digital media, make capital investments in our businesses which we expect to positively impact revenue, and look for new acquisition opportunities within broadcast. Our acquisition strategy will hinge upon our ability to identify strategic candidates, negotiate definitive agreements on acceptable terms and, as necessary, secure additional financing. The agreement to purchase two radio stations in Tulsa, Oklahoma is consistent with one of our strategic goals of creating additional broadcast scale in existing markets.
Results of Operations
First Quarter Ended March 25, 2012 compared to the First Quarter Ended March 27, 2011
Our consolidated revenue in the first quarter of 2012 was $82.3 million, a decrease of $1.6 million, or 1.9%, compared to $83.9 million in the first quarter of 2011. Our consolidated operating costs and expenses in the first quarter of 2012 were $49.1 million, a decrease of $0.4 million, or 1.0%, compared to $49.5 million in the first quarter of 2011. Our consolidated selling and administrative expenses in the first quarter of 2012 were $27.5 million, a decrease of $0.9 million, or 3.0%, compared to $28.4 million in the first quarter of 2011.
The following table presents our total revenue by segment, total operating costs and expenses, selling and administrative expenses and total operating earnings as a percent of total revenue for the first quarter of 2012 and the first quarter of 2011:
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